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Oil's Well?

Oil companies around the world are rapidly scaling back exploration and refining plans since the price of crude has plummeted from $147 to just above $40 a barrel over the past four months.

With demand slowing, income plunging and credit scarce, prospecting for new oil looks a lot less lucrative -- and is harder to execute.

"Everyone is cutting projects, or they are not planning to increase them. It's a trend that happened very quickly," said Ben Brockwell, a senior analyst with Oil Price Information Service in Gaithersburg, Md. "A few months ago, everyone wanted to expand; there was a lot of demand for labor. Now, they cannot afford to undertake these projects anymore."

The drop in supplies could drive oil prices back up much faster this new year, according to experts. The International Energy Association warned that oil prices might soar after the economy recovers, if companies defer investments. "Exotic" projects like the Alberta oil sands or explorations offshore Greenland are put on hold until investments become profitable.

Hardest hit by the sharp oil price drop are national or small oil companies obliged to abandon exploration projects.

"We have daily examples of companies cutting plans for spending next year, as they cannot finance their operations," said Armstrong Addison, director of market research for Tradition Energy, which advises companies on energy management.

Citing lower gas prices, Chesapeake Energy, the largest U.S. producer of natural gas, said that it planned to cut $4.7 billion from its capital-expenditure plans through 2010. The company lowered its 2008 production growth forecast to 18 percent from 21 percent, and to 16 percent from 19 percent for 2009 and 2010, said Sandeep Yadav, analyst at the market research firm Global Markets Direct.

Houston-based exploration company Petrohawk Energy cut its 2009 capital-expenditure program by a third, to $1 billion.

Quicksilver Resources, a production company in Fort Worth, is also cutting capital spending.

"If the oil price remains around $50 or $55, that would mean cutting at least 60 percent of budgeted projects for the next one or two years from the national oil companies," Fu Chengyu, chief executive of China National Offshore Oil Corporation, told a conference in Barcelona this past November.

International oil producers are following suit.

Russia's Lukoil scaled back 2009 spending plans to $6 billion from $11 billion, and could take them down to $4 billion if oil stays below $50 per barrel, according to Energy Intelligence Group, an independent company that provides energy data and analysis.

Suncor Energy Inc. and Petro-Canada, two of Canada's largest oil companies, are slashing 2009 spending plans by one-third, due to falling oil prices and credit scarcity.

"Some of the oil companies are dependent on credit, and they can't borrow money anymore," said Tom Wallin, an analyst with the New York-based Energy Intelligence Group.

Tighter credit has driven oil companies' public equity and debt offerings down by more than 30 percent in Q3 2008 from Q2, according to a report by the research company GlobalData, "Financing Trends in the Oil & Gas Industry."

Yet even as oil companies retrench, the International Energy Agency said in its annual "World Energy Outlook" that the world must invest more than $1 trillion annually in order to ensure adequate energy supplies now and for the future.

Many analysts expect oil prices to climb again, as oil demand and production shrink, and put downward pressure on the oil supply.